Why Some Struggling Startups Get Bought For Millions Of Dollars While Others Are Left To Die

"Got
to visit our new acquisition, Stamped, this morning - happy to be
reunited with Robby (rmstein) and his team," Mayer posted on
Instagram.Twitter/@Marissamayer

How do some struggling startups get bought for millions of
dollars
by Facebook or
Yahoo, while others are left to die?

Networking is an important part
of building a business. For first-time founders, who you know is
arguably more important than what you build. At least it is if
you're looking to get acquired for a few million dollars by a
larger company — or "acqui-hired."

Josh Miller, 22, dropped out of
Princeton to found Branch. He built a network of seasoned startup
advisors, such as Twitter co-founders Evan Williams and Biz
Stone. Facebook recently bought his startup for $15 million after
multiple product pivots. Stamped, an app founded by former
Googlers, was acquired by another former Googler, Marissa Mayer,
when she became CEO of Yahoo. That app also pivoted before it was
acquired.

Would either of those startups have sold for millions if the
founders hadn't built strong personal networks? It's hard to say,
but who they know certainly didn't hurt them.

Business Insider asked a number
of startup executives which was more important for first-time
founders: building a network or building a strong product?

Everyone felt both were
important. But for smaller acquisitions or "soft landings," many
felt personal networks trumped products. Who your
investors know can also be a big factor in whether or not your
startup gets acquired.

James Reinhart is a first-time
founder. He created a company, ThredUp, which lets you sell gently
worn clothes on its marketplace. "I think there's a misconception
that exits 'just happen,'" he said when asked about
the importance of networking. "I'm learning that it's a long game
and you need to get to know everyone." He also says product
matters more when you're gunning for a larger exit.

I think there's a misconception that exits 'just
happen.'

Dan Porter, who advises
startups and sold his former company to Zynga for more than $200
million, has mixed feelings.

"I think it's a combination of who you know and who knows you for
any acquisition under a certain threshold," he
says. "In [lower
threshold] acquisitions, someone is trying to either add a team,
a technology, or eliminate a competitive risk. When acquirers
know you, and in a smaller deal you are a critical part of the
deal, that makes it a lot easier. It de-risks the deal."

Who you know within a larger
company can also determine whether or not your startup gets
acquired. "The smartest
thing I heard someone say was, 'Our best acquisitions come to us
from product managers who work with or know companies than from
corporate development guys,'" said Porter. "Not just being known
— but who in the company knows you — is key."

Others think product is always
the most important factor, even for smaller startups. Josh
Abramson created BustedTees, College Humor, and Vimeo. He sold a
majority stake in them to Barry Diller's IAC. "I actually
think that building something great is the most important thing,
but knowing the right people is also hugely important," he
says.

"I think it's
pretty rare that entrepreneurs end up with a lucrative exit for
no other reason than because they know the right person, just as
it would be rare for an entrepreneur who has built an incredible
company to fly completely under the radar of potential acquirers
... You might have
a harder time getting a deal done if you live in the middle of
nowhere and have very few connections outside of your
organization, but you will have an even harder time if you have a
piece of crap company and know everyone in town."

Bryan Goldberg also feels what you build is more important than
who you know. But his experience was with a larger-size exit. He
sold the startup he co-founded, Bleacher Report, for $213 million
to Turner.

"We knew that our startup would
ultimately be acquired by a media heavyweight, and so we
partnered with several big media companies along the way," said
Goldberg. "As it turned out, the company who purchased us was one
of the few big media companies with whom we
didn't have any previous relationship.

As it turned out, the company who purchased us was one of the few
big media companies with whom we didn't have any
previous relationship.

"It doesn't matter who you know, nobody is going to buy you
without a strategic reason for doing so. At least not for a large
acquisition."

When asked if his investors'
personal networks helped him land a sizeable exit, Goldberg
replied, "The investors and board members were all central to the
company's success, But none of them were close to our acquirers
in a way that would have pushed through a deal."

One founder who knows a lot about acqui-hires is Jacob Mullins.
He's CEO of Exit Round, a
platform that connects large companies with startups so the two
can discuss potential talent acquisitions. He's a firm believer
that who you know is more important than what you build for three
reasons:

1. Getting acquired
requires internal champions. "The most effective
way to get serious interest with a potential acquirer is to have
someone from within their product or engineering group who can
speak on your behalf and give you exposure to the right internal
champion," says Mullins. "To execute a transaction you need a
C-level or GM of a business unit to be your internal champion to
build a business case about why you are indispensable and must be
had."

2. Networking helps you meet buyers
early. "Like fundraising, achieving an exit is a
relationship building process," says Mullins. "If you're in a
sticky situation where things are rushed, there's less of an
opportunity to build mutual trust. If you connect early, over
time the potential acquirer will see how you execute, build trust
with the quality of your product, and build a stronger
relationship with you, the founder."

3. Networking helps you figure out if a larger company
will be the right fit before it's too late. "Nearly
all acquisitions have a time-based component that incentivizes
the acquired team to stay at the new company for as long as
possible; typically this is where the bulk of the payout lies for
the team and individuals," Mullins says. "If a founder commits a
transaction where there isn't a great fit, unhappiness may ensure
and people may start leaving early, thus leaving a lot of
opportunity and money on the table. Know who you're going to be
working with, and what exactly you're going to be doing for the
next few years."

Howard Lerman is the CEO and
co-founder of Yext, a company
that updates local listings in real-time and is worth hundreds of
millions. He sums up the importance of product versus network
nicely.

"For sub-hundred-million-dollar
acquisitions, it definitely matters who you know. Those are
usually tech or team acquisitions," he says. "For larger exits,
you have to have a real business in a market that another
business is excited about. Knowing people doesn't really help
that. A good rule of thumb: the bigger the acquisition, the less
who you know matters."